Edgar Filing: 1 800 FLOWERS COM INC

flws20131229_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 29, 2013

___

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File No. 0-26841

1-800-FLOWERS.COM, Inc.

(Exact name of registrant as specified in its charter)

DELAWARE		11-3117311
(State of		(I.R.S. Employer
incorporation)		Identification No.)

One Old Country Road, Carle Place, New York 11514

(Address of principal executive offices)(Zip code)

(516) 237-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☑
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

The number of shares outstanding of each of the Registrant’s classes of common stock:

27,416,849

(Number of shares of Class A common stock outstanding as of February 3, 2014)

36,778,594

(Number of shares of Class B common stock outstanding as of February 3, 2014)

1-800-FLOWERS.COM, Inc.

TABLE OF CONTENTS

INDEX

		Page

Part I.	Financial Information

Item 1.	Consolidated Financial Statements:

	Consolidated Balance Sheets – December 29, 2013 (Unaudited) and June 30, 2013	1

	Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended December 29, 2013 and December 30, 2012	2

	Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended December 29, 2013 and December 30, 2012	3

	Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended December 29, 2013 and December 30, 2012	4

	Notes to Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27

Part II.	Other Information

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults upon Senior Securities	29

Item 4.	Mine Safety Disclosures	29

Item 5.	Other Information	29

Item 6.	Exhibits	30

Signatures		31

PART I. – FINANCIAL INFORMATION

ITEM 1. – CONSOLIDATED FINANCIAL STATEMENTS

1-800-FLOWERS.COM, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

	December 29, 2013			June 30, 2013
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3,260		$	154
Receivables, net		38,043			14,957
Inventories		57,913			55,756
Deferred tax assets		6,617			5,746
Prepaid and other		7,133			9,941
Current assets of discontinued operations		4,275			6,095
Total current assets		117,241			92,649

Property, plant and equipment, net		55,747			52,943
Goodwill		54,105			47,943
Other intangibles, net		45,585			43,276
Deferred tax assets		1,755			2,127
Other assets		8,257			10,086
Non-current assets of discontinued operations		1,023			1,049
Total assets	$	283,713		$	250,073

Liabilities and equity
Current liabilities:
Accounts payable	$	17,887		$	26,235
Accrued expenses		72,405			45,044
Current maturities of long-term debt		388			-
Current liabilities of discontinued operations		2,081			4,484
Total current liabilities		92,761			75,763

Long term debt		3,000			-
Other liabilities		6,080			5,039
Total liabilities		101,841			80,802
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued		-			-
Class A common stock, $.01 par value, 200,000,000 shares authorized; 37,940,040 and 36,280,425 shares issued at December 29, 2013 and June 30, 2013, respectively		379			362
Class B common stock, $.01 par value, 200,000,000 shares authorized; 42,058,594 and 42,125,465 shares issued at December 29, 2013 and June 30, 2013, respectively		421			421
Additional paid-in capital		300,791			298,580
Retained deficit		(70,549	)		(83,937	)
Accumulated other comprehensive loss		(12	)		-
Treasury stock, at cost – 10,489,646 and 9,257,231 Class A shares at December 29, 2013 and June 30, 2013, respectively, and 5,280,000 Class B shares at December 29, 2013 and June 30, 2013		(52,685	)		(46,155	)
Total stockholders’ equity		178,345			169,271
Noncontrolling interest in subsidiary		3,527			-
Total equity		181,872			169,271
Total liabilities and equity	$	283,713		$	250,073

See accompanying Notes to Consolidated Financial Statements.

1-800-FLOWERS.COM, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	Three Months Ended						Six Months Ended
	December 29, 2013			December 30, 2012			December 29, 2013			December 30, 2012

Net revenues	$	266,337		$	251,360		$	389,385		$	370,952
Cost of revenues		155,360			146,879			227,111			217,046
Gross profit		110,977			104,481			162,274			153,906
Operating expenses:
Marketing and sales		57,656			54,483			92,135			87,206
Technology and development		5,319			5,363			10,717			10,759
General and administrative		14,267			13,354			28,079			26,415
Depreciation and amortization		5,036			4,521			9,725			8,968
Total operating expenses		82,278			77,721			140,656			133,348
Operating income		28,699			26,760			21,618			20,558
Interest expense and other, net		377			538			669			824
Income from continuing operations before income taxes		28,322			26,222			20,949			19,734
Income tax expense from continuing operations		10,798			9,715			7,982			7,670
Income from continuing operations		17,524			16,507			12,967			12,064
Loss from discontinued operations, net of tax		(374	)		(496	)		(456	)		(659	)
Adjustment to loss on sale of discontinued operations, net of tax		877			-			877			-
Income (loss) from discontinued operations		503			(496	)		421			(659	)
Net income	$	18,027		$	16,011		$	13,388		$	11,405

Basic net income per common share:
From continuing operations	$	0.27		$	0.25		$	0.20		$	0.19
From discontinued operations		0.01			(0.01	)		0.01			(0.01	)
Basic net income per common share	$	0.28		$	0.25		$	0.21		$	0.18

Diluted net income per common share:
From continuing operations	$	0.27		$	0.25		$	0.20		$	0.18
From discontinued operations		0.01			(0.01	)		0.01			(0.01	)
Diluted net income per common share	$	0.27		$	0.24		$	0.20		$	0.17

Weighted average shares used in the calculation of net income per common share:
Basic		64,016			64,824			63,907			64,665
Diluted		66,095			66,557			66,383			66,695

See accompanying Notes to Consolidated Financial Statements.

1-800-FLOWERS.COM, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

	Three Months Ended					Six Months Ended
	December 29, 2013			December 30, 2012		December 29, 2013			December 30, 2012
	(in thousands)

Net income	$	18,027		$	16,011	$	13,388		$	11,405
Other comprehensive income (loss)		(12	)		-		(12	)		17
Comprehensive income	$	18,015		$	16,011	$	13,376		$	11,422

See accompanying Notes to Consolidated Financial Statements.

1-800-FLOWERS.COM, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended
	December 29, 2013			December 30, 2012

Operating activities
Net income	$	13,388		$	11,405
Reconciliation of net income to net cash provided by operating activities:
Operating activities of discontinued operations		320			(269	)
Adjustment to loss on sale of discontinued operations		(877	)		-
Depreciation and amortization		9,725			8,968
Amortization of deferred financing costs		153			229
Deferred income taxes		(870	)		(909	)
Noncontrolling interest		(41	)		-
Bad debt expense		643			477
Stock-based compensation		2,211			2,304
Other non-cash items		385			213
Changes in operating items, excluding the effects of acquisitions:
Receivables		(26,059	)		(22,431	)
Inventories		(2,057	)		(2,083	)
Prepaid and other		2,904			3,834
Accounts payable and accrued expenses		17,213			19,915
Other assets		(155	)		(306	)
Other liabilities		947			(208	)
Net cash provided by operating activities		17,830			21,139

Investing activities
Acquisitions, net of cash acquired		(1,385	)		-
Capital expenditures		(9,832	)		(9,091	)
Purchase of investments		8			(1,321	)
Other, net		1			34
Investing activities of discontinued operations		-			(37	)
Net cash used in investing activities		(11,208	)		(10,415	)

Financing activities
Acquisition of treasury stock		(6,530	)		(5,149	)
Proceeds from exercise of employee stock options		17			83
Proceeds from bank borrowings		88,000			47,000
Repayment of bank borrowings		(85,007	)		(54,500	)
Other		4			(48	)
Net cash used in financing activities		(3,516	)		(12,614	)
Net change in cash and cash equivalents		3,106			(1,890	)
Cash and cash equivalents:
Beginning of period		154			28,854
End of period	$	3,260		$	26,964

See accompanying Notes to Consolidated Financial Statements.

Note 1 – Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and subsidiaries (the “Company”) in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month period ended December 29, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending June 29, 2014. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2013.

The Company’s quarterly results may experience seasonal fluctuations. Due to the Company’s expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, generates the highest proportion of the Company’s annual revenues. Additionally, as the result of a number of major floral gifting occasions, including Mother's Day, Valentine’s Day and Administrative Professionals Week, revenues also rise during the Company’s fiscal third and fourth quarters. The Easter Holiday, which was in the Company’s third quarter during fiscal 2013, is in the fourth quarter of fiscal 2014.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU No. 2012-02”), which allows entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU No. 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test. Otherwise, the quantitative impairment test is not required. This ASU became effective for annual and interim goodwill impairment tests performed for the Company’s fiscal year ending June 29, 2014. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Reclassifications

Certain balances in the prior fiscal years have been reclassified to conform to the presentation in the current fiscal year.

Note 2 – Net Income Per Common Share from Continuing Operations

The following table sets forth the computation of basic and diluted net income per common share from continuing operations:

	Three Months Ended				Six Months Ended
	December 29, 2013		December 30, 2012		December 29, 2013		December 30, 2012
			(in thousands, except per share data)
Numerator:
Income from continuing operations	$	17,524	$	16,507	$	12,967	$	12,064

Denominator:
Weighted average shares outstanding		64,016		64,824		63,907		64,665
Effect of dilutive securities:
Employee stock options (1)		990		481		1,103		532
Employee restricted stock awards		1,089		1,252		1,373		1,498
		2,079		1,733		2,476		2,030
Adjusted weighted-average shares and assumed conversions		66,095		66,557		66,383		66,695

Net income per common share from continuing operations
Basic	$	0.27	$	0.25	$	0.20	$	0.19
Diluted	$	0.27	$	0.25	$	0.20	$	0.18

Basic net income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares (consisting of employee stock options and unvested restricted stock awards) outstanding during the period.

(1)

The effect of options to purchase 1.2 million and 1.3 million shares during the three and six months ended December 29, 2013 and 3.1 million and 3.4 million shares during the three and six months ended December 30, 2012, respectively, were excluded from the calculation of net income per share on a diluted basis as their effect is anti-dilutive.

Note 3 – Stock-Based Compensation

The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013, that provides for the grant to eligible employees, consultants and directors of stock options, restricted shares, and other stock-based awards.

The amounts of stock-based compensation expense recognized in the periods presented are as follows:

	Three Months Ended				Six Months Ended
	December 29, 2013		December 30, 2012		December 29, 2013		December 30, 2012
			(in thousands)

Stock options	$	113	$	131	$	211	$	237
Restricted stock		1,032		1,184		2,000		2,067
Total		1,145		1,315		2,211		2,304
Deferred income tax benefit		431		919		831		909
Stock-based compensation expense, net	$	714	$	396	$	1,380	$	1,395

Stock-based compensation is recorded within the following line items of operating expenses:

	Three Months Ended				Six Months Ended
	December 29, 2013		December 30, 2012		December 29, 2013		December 30, 2012
			(in thousands)

Marketing and sales	$	275	$	460	$	648	$	806
Technology and development		68		132		175		231
General and administrative		802		723		1,388		1,267
Total	$	1,145	$	1,315	$	2,211	$	2,304

The weighted average fair value of stock options on the date of grant, and the assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model granted during the respective periods were as follows:

Three Months Ended

Six Months Ended

December 29,

2013 (1)

December 30,

2012 (1)

December 29,

2013 (1)

December 30,

2012

Weighted average fair value of options granted

n/a

2.40

Expected volatility

n/a

72.1

Expected life (years)

n/a

6.4

Risk-free interest rate

n/a

0.69

Expected dividend yield

n/a

0.0

(1)

No options were granted during the three and six months ended December 29, 2013, nor for the three months ended December 30, 2012.

The following table summarizes stock option activity during the six months ended December 29, 2013:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (000s)

Outstanding at July 1, 2013		4,723,240		$	3.89
Granted		-		$	-
Exercised		(6,600	)	$	2.57
Forfeited		(137,900	)	$	4.54
Outstanding at December 29, 2013		4,578,740		$	3.87		4.5	$	8,951

Options vested or expected to vest at December 29, 2013		4,453,090		$	3.92		4.4	$	8,553
Exercisable at December 29, 2013		3,129,840		$	4.60		3.1	$	3,924

As of December 29, 2013, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $2.0 million and the weighted average period over which these awards are expected to be recognized was 5.2 years.

The Company grants shares of Common Stock to its employees that are subject to restrictions on transfer and risk of forfeiture until fulfillment of applicable service conditions and, in certain cases, holding periods (Restricted Stock). The following table summarizes the activity of non-vested restricted stock awards during the six months ended December 29, 2013:

	Shares			Weighted Average Grant Date Fair Value

Non-vested at July 1, 2013		3,433,355		$	2.80
Granted		1,714,802		$	5.08
Vested		(1,586,144	)	$	2.50
Forfeited		(696,169	)	$	4.63
Non-vested at December 29, 2013		2,865,844		$	3.88

The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of December 29, 2013, there was $9.6 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over the weighted-average remaining period of 3.3 years.

Note 4 – Acquisitions and Dispositions

Acquisition of Colonial Gifts Limited

On December 3, 2013, the Company completed its acquisition of a controlling interest in Colonial Gifts Limited (iFlorist). IFlorist, located in the UK, is a direct-to-consumer marketer of floral and gift-related products sold and delivered throughout Europe, with annual revenue of approximately $12.8 million and an operating loss of approximately $0.9 million in its most recently completed year end, prior to acquisition. The acquisition was achieved in stages and was accounted for using the purchase method of accounting in accordance with the Financial Accounting Standards Board’s (“FASB”) guidance regarding business combinations.

Prior to December 3, 2013, the Company maintained an investment in iFlorist in the amount of $1.6 million, which was included on the Company’s balance sheet within Other assets. This investment was accounted for under the cost method, as the Company’s ownership stake was 19.9%, and it did not have the ability to exercise significant influence.

On December 3, 2013, the Company acquired an additional interest in iFlorist, bringing the Company’s ownership interest to 56.2%. The acquisition of the additional interest was financed through the conversion of $1.9 million of notes owed by iFlorist to the Company, and a $1.6 million cash payment to iFlorist’s founders. Concurrent with the additional investment, the Company remeasured its initial equity investment in iFlorist, and determined that the acquisition date fair value approximated the Company’s carrying value of $1.6 million, and therefore no gain or loss was recognized. On the acquisition date, the Company also measured the fair value of the noncontrolling interest which amounted to $3.6 million. The acquisition-date fair values of the Company’s previously held equity interest in iFlorist and the noncontrolling interest were determined based on the market price the Company paid for its ownership interest in iFlorist on the acquisition date, assuming that a 20% control premium was paid to obtain the controlling interest. The following summarizes the fair values of the acquisition date purchase price components:

	iFlorist Fair Value of Purchase Price Components
	(in thousands)
Cash	$	1,640
Converted debt		1,915
Initial equity investment		1,629
Noncontrolling interest		3,567
Total purchase price	$	8,751

The total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The Company is in the process of finalizing its allocation and this may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, revisions of useful lives of intangible assets, and the determination of any residual amount that will be allocated to goodwill. Of the acquired intangible assets, $1.3 million was assigned to customer lists, which is being amortized over the estimated remaining life of 3 years, $1.9 million was assigned to trademarks, and $6.2 million was assigned to goodwill, which is not expected to be deductible for tax purposes. As a result of cumulative tax losses in the foreign jurisdiction, offset in part by the deferred tax liability arising from the amortizable customer list which was considered a source of future income, the Company concluded that a full valuation allowance be recorded in such jurisdiction.

The following table summarizes the allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of acquisition of iFlorist:

	iFlorist Preliminary Purchase Price Allocation
	(in thousands)
Current assets	$	856
Intangible assets		3,177
Goodwill		6,162
Property, plant and equipment		2,006
Other assets		30
Total assets acquired		12,231

Current liabilities, including current maturities of long-term debt		3,014
Deferred tax liabilities		371
Other liabilities assumed		95
		3,480
Net assets acquired	$	8,751

The Company’s financial statements include the results of operations of its membership interest in iFlorist subsequent to the acquisition date. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial results would not have been material. The noncontrolling interest in subsidiary is included in the Company’s income statement within Interest expense and other, net, and is not material for the three and six months ended December 29, 2013.

Acquisition of Pingg

On May 31, 2013, the Company completed the acquisition of Pingg Corp., an online invitation and event planner with annual revenues of approximately $0.6 million in its most recently completed year end prior to the acquisition. The purchase price, which included the acquisition of software, receivables and certain other assets and related liabilities, was approximately $1.7 million. Approximately $0.5 million of the purchase price was assigned to goodwill. The acquisition was financed utilizing available cash balances. Operating results of the acquired entity, which are not significant, are reflected in the Company’s consolidated financial statements from the date of acquisition, in the 1-800-Flowers.com Consumer Floral segment.

Acquisition of 1-800-Flowers’ European trademarks

On March 11, 2013, the Company acquired the European rights to various derivations of the 1-800-Flowers’ tradename, trademark, URL’s and telephone numbers from Flowerscorp Pty Ltd. for a purchase price of $4.0 million, which is included within Other Intangibles, net. The Company has paid $3.0 million of the $4.0 million purchase price, and is required to make a final payment of $1.0 million on March 11, 2015 the balance of which is included on the balance sheet within “Other liabilities”.

Note 5 – Inventory

The Company’s inventory, stated at cost, which is not in excess of market, includes purchased and manufactured finished goods for resale, packaging supplies, raw material ingredients for manufactured products and associated manufacturing labor, and is classified as follows:

	December 29, 2013		June 30, 2013
	(in thousands)

Finished goods	$	26,524	$	30,906
Work-in-process		10,249		6,465
Raw materials		21,140		18,385
	$	57,913	$	55,756

Note 6 – Goodwill and Intangible Assets

The following table presents goodwill by segment and the related change in the net carrying amount:

	1-800-Flowers.com Consumer Floral		BloomNet Wire Service		Gourmet Food & Gift Baskets (1)		Total
	(in thousands)

Balance at June 30, 2013	$	10,251	$	-	$	37,692	$	47,943
Acquisition of iFlorist		6,162		-		-		6,162
Balance at December 29, 2013	$	16,413	$	-	$	37,692	$	54,105

(1)

The total carrying amount of goodwill for all periods in the table above is reflected net of $71.1 million of accumulated impairment charges, which were recorded in the Gourmet Food & Gift Baskets segment during fiscal 2009.

The Company’s other intangible assets consist of the following:

				December 29, 2013						June 30, 2013
	Amortization Period (years)			Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
						(in thousands)

Intangible assets with determinable lives
Investment in licenses	14	-	16	$	7,420	$	5,568	$	1,852	$	7,420	$	5,516	$	1,904
Customer lists	3	-	10		17,313		11,947		5,366		15,989		11,334		4,655
Other	5	-	8		2,538		2,538		-		2,538		2,513		25
					27,271		20,053		7,218		25,947		19,363		6,584

Trademarks with indefinite lives					38,367		-		38,367		36,692		-		36,692
Total identifiable intangible assets				$	65,638	$	20,053	$	45,585	$	62,639	$	19,363	$	43,276

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Future estimated amortization expense is as follows: remainder of fiscal 2014 - $0.9 million, fiscal 2015 - $1.8 million, fiscal 2016 - $1.6 million, fiscal 2017 - $0.9 million, fiscal 2018 - $0.6 million and thereafter - $1.4 million.

Note 7 – Investments

The Company has certain investments in non-marketable equity instruments of private companies. The Company accounts for these investments using the equity method if they provide the Company the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is appropriate. The Company records equity method investments initially at cost, and adjusts the carrying amount to reflect the Company’s share of the earnings or losses of the investee, including all adjustments similar to those made in preparing consolidated financial statements. The Company’s equity method investments are comprised of a 32% interest in Flores Online, a Sao Paulo, Brazil based internet floral and gift retailer, that the Company made on May 31, 2012. The book value of this investment was $3.6 million as of December 29, 2013 and $3.8 million as of June 30, 2013, and is included in Other assets within the consolidated balance sheets. The Company’s equity in the net loss of Flores Online for the three and six months ended December 29, 2013 was less than $0.1 million and $0.2 million, respectively.

Investments in non-marketable equity instruments of private companies, where the Company does not possess the ability to exercise significant influence, are accounted for under the cost method. Cost method investments are originally recorded at cost, and are included within Other assets in the Company’s consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was $0.7 million as of December 29, 2013 and $2.3 million as of June 30, 2013. In addition, the Company had notes receivable from companies it maintains an investment in of $0.5 million as of December 29, 2013 and $2.3 million as of June 30, 2013. As described in Note 4 “Acquisitions and Dispositions” above, on December 2, 2013, the Company increased its investment in iFlorist, resulting in a majority ownership interest (56%) and consolidation of iFlorist’s operations, through the conversion of notes receivable and the purchase of additional shares from the Company’s founders. The acquisition of a majority interest in iFlorist resulted in the consolidation of iFlorist’s operations, and the reduction of both the Company’s cost-basis investment and notes receivable between June 30, 2013 and December 29, 2013.

The Company also holds certain trading securities in a “rabbi trust”, associated with its Non-Qualified Deferred Compensation Plan (“NQDC Plan”). These investments are measured using quoted market prices at the reporting date and are included in Other assets in the consolidated balance sheets (see Note 9).

Each reporting period, the Company uses available qualitative and quantitative information to evaluate its investments for impairment. When a decline in fair value, if any, is determined to be other-than-temporary, an impairment charge is recorded in the consolidated statement of operations.

Note 8 –Debt

The Company’s current and long-term debt consists of the following:

	December 29, 2013		June 30, 2013
	(in thousands)

Revolving line of credit (1)	$	3,000	$	-
Bank loan (2)		388		-
Total debt	$	3,388	$	-
Less current maturities of long-term debt		388		-
Long-term debt	$	3,000	$	-

(1)

On April 10, 2013, the Company repaid all amounts outstanding under its 2010 Credit Facility, and entered into a Third Amended and Restated Credit Agreement (the “2013 Credit Facility”). The 2013 Credit Facility consists of a revolving line of credit with a seasonally adjusted limit ranging from $150.0 to $200.0 million and a working capital sublimit ranging from $25.0 to $75.0 million. The 2013 Credit Facility also revised certain financial and non-financial covenants, including the maintenance of certain financial ratios. The Company was in compliance with these covenants as of December 29, 2013 and June 30, 2013. Outstanding amounts under the 2013 Credit Facility, which matures on April 10, 2018, bear interest at the Company’s option at either: (i) LIBOR, plus a spread of between 150 and 225 basis points, as determined by the Company’s leverage ratio, or (ii) the agent bank’s prime rate plus a margin. The obligations of the Company and its subsidiaries under the 2013 Credit Facility are secured by liens on all personal property of the Company and its domestic subsidiaries.

(2)

Bank loan assumed through the Company’s acquisition of a majority interest in iFlorist.

Note 9-Fair Value Measurements

Cash and cash equivalents, receivables, accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments. Although no trading market exists, the Company believes that the carrying amount of its debt approximates fair value due to its variable nature. The Company’s investments in non-marketable equity instruments of private companies are carried at cost and are periodically assessed for other-than-temporary impairment, when an event or circumstances indicate that an other-than-temporary decline in value may have occurred. The Company’s remaining financial assets and liabilities are measured and recorded at fair value (see table below). The Company’s non-financial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. Goodwill and indefinite lived intangibles are also tested for impairment annually, as required under the accounting standards.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:

Level 1	Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2	Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3	Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table presents by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis as of December 29, 2013:

	Carrying		Fair Value Measurements Assets (Liabilities)
	Value		Level 1		Level 2		Level 3
			(in thousands)
Assets (liabilities):
Trading securities held in a “rabbi trust” (1)	$	1,994	$	1,994	$	-	$	-
Non-performance promissory note		205		-		-		205
	$	2,199	$	1,994	$	-	$	205

(1)

Trading securities held in a rabbi trust are measured using quoted market prices at the reporting date and are included in Other assets in the consolidated balance sheets. The Company established a Non-qualified Deferred Compensation Plan for certain members of senior management in fiscal 2009. Deferred compensation is invested in mutual funds held in a “rabbi trust” which is restricted for payment to participants of the NQDC Plan.

The following table presents, by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013:

	Carrying		Fair Value Measurements Assets (Liabilities)
	Value		Level 1		Level 2		Level 3
			(in thousands)
Assets (liabilities):
Trading securities held in a “rabbi trust” (1)	$	1,708	$	1,708	$	-	$	-
Non-performance promissory note		205		-		-		205
	$	1,913	$	1,708	$	-	$	205

(1)

Note 10 – Income Taxes

At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The Company’s effective tax rate from continuing operations for the three and six months ended December 29, 2013 was 38.2% and 38.1% respectively, compared to 37.1% and 39.0% in the same periods of the prior year. The effective rate for fiscal 2014 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, and other permanent differences, offset by tax credits and incentives. The effective rate for fiscal 2013 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, and other permanent differences, including the impact of expiring non-qualified stock options, offset by tax credits and incentives.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company concluded its federal examination for fiscal 2011 during the quarter ended December 29, 2013, however, fiscal years 2010 and 2012 remain subject to federal examination. Due to non-conformity with the federal statute of limitations for assessment, certain states remain open from fiscal 2008.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At December 29, 2013, the Company has an unrecognized tax position of approximately $0.8 million, including accrued interest and penalties of $0.1 million. The Company believes that $0.4 million of its unrecognized tax positions will be resolved over the next twelve months.

Note 11 – Business Segments

The Company’s management reviews the results of the Company’s operations by the following three business segments:

●

1-800-Flowers.com Consumer Floral,

●

BloomNet Wire Service, and

●

Gourmet Food and Gift Baskets

Segment performance is measured based on contribution margin, which includes only the direct controllable revenue and operating expenses of the segments. As such, management’s measure of profitability for these segments does not include the effect of corporate overhead (see (1) below), nor does it include depreciation and amortization, other income, and income taxes, or stock-based compensation, which is included within corporate overhead. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by segment.

	Three Months Ended						Six Months Ended
Net Revenues from Continuing Operations	December 29, 2013			December 30, 2012			December 29, 2013			December 30, 2012
	(in thousands)

Segment Net Revenues:
1-800-Flowers.com Consumer Floral	$	97,133		$	91,825		$	168,682		$	164,602
BloomNet Wire Service		19,912			18,734			40,258			38,501
Gourmet Food & Gift Baskets		149,624			141,081			180,863			168,211
Corporate (1)		203			200			398			394
Intercompany eliminations		(535	)		(480	)		(816	)		(756	)
Total net revenues	$	266,337		$	251,360		$	389,385		$	370,952

	Three Months Ended						Six Months Ended
Operating Income from Continuing Operations	December 29, 2013			December 30, 2012			December 29, 2013			December 30, 2012
				(in thousands)

Segment Contribution Margin:
1-800-Flowers.com Consumer Floral	$	8,680		$	10,286		$	15,109		$	17,172
Bloomnet Wire Service		6,525			6,049			12,964			11,845
Gourmet Food & Gift Baskets		31,044			27,599			28,997			25,321
Segment Contribution Margin Subtotal		46,249			43,934			57,070			54,338
Corporate (1)		(12,514	)		(12,653	)		(25,727	)		(24,812	)
Depreciation and amortization		(5,036	)		(4,521	)		(9,725	)		(8,968	)
Operating income	$	28,699		$	26,760		$	21,618		$	20,558

(1)

Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above segments based upon usage, are included within corporate expenses, as they are not directly allocable to a specific segment.

Note 12-Discontinued Operations

During the fourth quarter of fiscal 2013, the Company made the strategic decision to divest the e-commerce and procurement businesses of The Winetasting Network in order to focus on growth opportunities in its Gourmet Foods and Gift Baskets business segment. The Company closed on the sale of its Winetasting Network business on December 31, 2013, at an estimated loss of $1.0 million ($0.6 million, net of tax). The Company had originally estimated a loss of $2.3 million ($1.5 million, net of tax), which was provided for during the fourth quarter of fiscal 2013, but the loss was reduced to $1.0 million, upon finalization of terms and closing on the sale. As a result, the Company reversed $1.4 million ($0.9 million, net of tax) of its accrual for the estimated loss during the quarter ended December 29, 2013. The Company has classified the results of its e-commerce and procurement business of Winetasting Network as a discontinued operation for all periods presented.

Results for discontinued operations are as follows:

	Three Months Ended						Six Months Ended
	December 29, 2013			December 30, 2012			December 29, 2013			December 30, 2012
	(in thousands)
Net revenues from discontinued operations	$	755		$	1,654		$	1,661		$	2,930
Loss from discontinued operations, net of tax	$	(374	)	$	(496	)	$	(456	)	$	(659	)
Adjustment to loss on sale of discontinued operations, net of tax	$	877		$	-		$	877		$	-
Income (loss) from discontinued operations, net of tax		503			(496	)	$	421		$	(659	)

Note 13 – Commitments and Contingencies

Legal Proceedings

From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business.

On November 10, 2010, a purported class action complaint was filed in the United States District Court for the Eastern District of New York naming the Company (along with Trilegiant Corporation, Inc., Affinion, Inc. and Chase Bank USA, N.A.) as defendants in an action purporting to assert claims against the Company alleging violations arising under the Connecticut Unfair Trade Practices Act among other statutes, and for breach of contract and unjust enrichment in connection with certain post-transaction marketing practices in which certain of the Company's subsidiaries previously engaged in with certain third-party vendors. On December 23, 2011, plaintiff filed a notice of voluntary dismissal seeking to dismiss the entire action without prejudice. The court entered an Order on November 28, 2012, dismissing the case in its entirety. This case was subsequently refiled in the United States District Court for the District of Connecticut.

On March 6, 2012 and March 15, 2012, two additional purported class action complaints were filed in the United States District Court for the District of Connecticut naming the Company and numerous other parties as defendants in actions purporting to assert claims substantially similar to those asserted in the lawsuit filed on November 10, 2010. In each case, plaintiffs seek to have the respective case certified as a class action and seek restitution and other damages, each in an amount in excess of $5.0 million. On April 26, 2012, the two Connecticut cases were consolidated with a third case previously pending in the United States District Court for the District of Connecticut in which the Company is not a party (the "Consolidated Action"). A consolidated amended complaint was filed by plaintiffs on September 7, 2012, purporting to assert claims substantially similar to those originally asserted. The Company moved to dismiss the consolidated amended complaint on December 7, 2012, which was subsequently refiled at the direction of the Court on January 16, 2013.

On December 5, 2012, the same plaintiff from the action voluntarily dismissed in the United States District Court for the Eastern District of New York filed a purported class action complaint in the United States District Court for the District of Connecticut naming the Company and numerous other parties as defendants, purporting to assert claims substantially similar to those asserted in the consolidated amended complaint (the “Frank Action”). On January 23, 2013, plaintiffs in the Consolidated Action filed a motion to transfer and consolidate the action filed on December 5, 2012 with the Consolidated Action. The Company intends to defend each of these actions vigorously.

On January 31, 2013, the court issued an order to show cause directing plaintiffs' counsel in the Frank Action, also counsel for plaintiffs in the Consolidated Action, to show cause why the Frank Action is distinguishable from the Consolidated Action such that it may be maintained despite the prior-pending action doctrine. On June 13, 2013 the court issued an order in the Frank Action suspending deadlines to answer or to otherwise respond to the complaint until 21 days after the court decides whether the Frank Action should be consolidated with the Consolidated Action. On July 24, 2013 the Frank Action was reassigned to Judge Vanessa Bryant, before whom the Consolidated Action is currently pending, for all further proceedings. On August 14, 2013, other defendants filed a motion for clarification in the Frank Action requesting that Judge Bryant clarify the order suspending deadlines.

There has been no ruling on (1) plaintiff’s motion to consolidate, (2) the order to show cause, (3) the motion for clarification, or (4) the Company’s motion seeking to dismiss the plaintiffs’ amended consolidated complaint. Oral argument thereon was held on September 25, 2013, but no ruling has yet been issued.

There are no assurances that additional legal actions will not be instituted in connection with the Company’s former post-transaction marketing practices involving third party vendors nor can we predict the outcome of any such legal action. At this time, we are unable to estimate a possible loss or range of possible loss for the aforementioned actions for various reasons, including, among others: (i) the damages sought are indeterminate, (ii) the proceedings are in the very early stages and the court has not yet ruled as to whether the classes will be certified, and (iii) there is uncertainty as to the outcome of pending motions. As a result of the foregoing, we have determined that the amount of possible loss or range of loss is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which may be beyond our control.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward Looking Statements

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-Q and in the Company’s Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Forward-Looking Information and Factors That May Affect Future Results” and under Part I, Item 1A, of the Company’s Annual Report on Form 10-K under the heading “Risk Factors.”

Overview

1-800-FLOWERS.COM, Inc. is the world's leading florist and gift shop. For more than 35 years, 1-800-FLOWERS® (1-800-356-9377 or www.1800flowers.com) has been helping deliver smiles for our customers with gifts for every occasion, including fresh flowers and the finest selection of plants, gift baskets, gourmet foods, confections, candles, balloons and plush stuffed animals. As always, our 100% Smile Guarantee backs every gift. 1-800-FLOWERS.COM has been honored in Internet Retailer's "Hot 500 Guide" for 2013. 1-800-FLOWERS.COM was recognized for our mobile site with a Gold Award in the Ecommerce/Shopping category of the 2012 Horizon Interactive Awards. 1-800-FLOWERS.COM was also rated number one vs. competitors for customer service by STELLAService and named by the E-Tailing Group as one of only nine online retailers out of 100 benchmarked to meet the criteria for Excellence in Online Customer Service in 2011.

The Company's BloomNet® international floral wire service (www.mybloomnet.net) provides a broad range of quality products and value-added services designed to help professional florists grow their businesses profitably. The 1-800-FLOWERS.COM "Gift Shop" also includes gourmet gifts such as popcorn and specialty treats from: The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); cookies and baked gifts from Cheryl's® (1-800-443-8124 or www.cheryls.com); premium chocolates and confections from Fannie May® confections (www.fanniemay.com and www.harrylondon.com); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); carved fresh fruit arrangements from FruitBouquets.com (www.fruitbouquets.com); top quality steaks and chops from Stock Yards® (www.stockyards.com); as well as premium branded customizable invitations and personal stationery from FineStationery.com® (www.finestationery.com). The Company's Celebrations® brand (www.celebrations.com) is a source for creative party ideas, must-read articles, online invitations and e-cards, all created to help people celebrate holidays and the everyday. 1-800-FLOWERS.COM, Inc. is involved in a broad range of corporate social responsibility initiatives including continuous expansion and enhancement of its environmentally-friendly "green" programs as well as various philanthropic and charitable efforts.

Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS.

Segment Information

The following table presents the contribution of net revenues, gross profit and contribution margin from each of the Company’s business segments, as well as consolidated EBITDA and Adjusted EBITDA. As noted previously, the Company’s e-commerce and procurement businesses of The Winetasting Network, which had previously been included within its Gourmet Foods & Gift Baskets category, have been classified as discontinued operations and therefore excluded from segment information below.

	Three Months Ended									Six Months Ended
	December 29, 2013			December 30, 2012			% Change			December 29, 2013			December 30, 2012			% Change
	(dollars in thousands)									(dollars in thousands)
Net revenues from continuing operations:
1-800-Flowers.com Consumer Floral	$	97,133		$	91,825			5.8	%	$	168,682		$	164,602			2.5	%
BloomNet Wire Service		19,912			18,734			6.3	%		40,258			38,501			4.6	%
Gourmet Food & Gift Baskets		149,624			141,081			6.1	%		180,863			168,211			7.5	%
Corporate (*)		203			200			-1.5	%		398			394			1.0	%
Intercompany eliminations		(535	)		(480	)		-11.5	%		(816	)		(756	)		-7.9	%
Total net revenues from continuing operations	$	266,337		$	251,360			6.0	%	$	389,385		$	370,952			5.0	%

	Three Months Ended									Six Months Ended
	December 29, 2013			December 30, 2012			% Change			December 29, 2013			December 30, 2012			% Change
Gross profit from continuing operations:
1-800-Flowers.com Consumer Floral	$	37,643		$	35,954			4.7	%	$	65,601		$	64,246			2.1	%
		38.8	%		39.2	%					38.9	%		39.0	%
BloomNet Wire Service		10,764			9,792			9.9	%		21,547			19,592			10.0	%
		54.1	%		52.3	%					53.5	%		50.9	%
Gourmet Food & Gift Baskets		62,403			58,574			6.5	%		74,642			69,567			7.3	%
		41.7	%		41.5	%					41.3	%		41.4	%
Corporate (*)		167			161			3.7	%		484			501			-3.4	%
		82.3	%		80.5	%					121.6	%		127.2	%
Total gross profit from continuing operations	$	110,977		$	104,481			6.2	%	$	162,274		$	153,906			5.4	%
		41.7	%		41.6	%					41.7	%		41.5	%

Three Months Ended

Six Months Ended

December 29,

2013

December 30,

2012

% Change

December 29,

2013

December 30,

2012

% Change

EBITDA from continuing operations, excluding stock-based compensation:

Segment Contribution Margin (**)

1-800-Flowers.com Consumer Floral

8,680